Michael Beals asked about Medifast (MED). I'm not a fan.
(You guys know that when I put a title like "Medifast Is A Value Trap For Rule One Investors", its my opinion, right? It's not advice or a recommendation. The purpose of this blog is to have a rational discussion about stocks and investing that starts with my opinion. You can have a different opinion and we can discuss it amongst our little Rule One community of rational investors. That discussion should help you make better investing decisions.)
That said, my opinion on Medifast is that its growing itself by pushing its multi-level sales program. I'm not much of a fan of multi-level. Too many of them are about selling the business, not the product and that, , in my opinion, makes them a pyramid scheme.
There are a few multis that are good. Buffett recently bought Pampered Chef. Pampered Chef is distinguished by the ability of its sales people to make a living by selling the Pampered Chef product line at Pampered Chef parties.
Here's how you tell if its a bad-guy kind of MLM. You do not see a significant percentage of its distributors making a living just selling the product.
(By the way, if you have not had the pleasure of someone befriending you with the secret purpose of selling you on becoming part of their MLM downline, you must not be getting out much. The MLMs are everywhere selling everything from nutrients to cosmetics to legal insurance. Almost any product that has very high profit margins can be made into a multilevel product. You need the big margins because you have all these levels that get paid when someone sells something. The pitch is that multilevel distributors eliminate advertising costs but the actual cost of all those distributors in the middle massively outweighs advertising. Its the effectiveness of the MLM program that moves the product. Distributors have to buy product in order to participate. Often, that's the only product buying going on.)
Here's the thing that bothers me about the Medifast MLM plan - it only pays a 10-15% commission to its sales people when they sell the product sans the business. Do you think you could drum up sales and incur the costs of doing business and make a profit with a 10% margin? Melissa and I were recently offered a regular distributorship for a wonderful horse feed that we buy for our competition horses. The company offered to pay us 10% to set up a little distribution business to sell this premium feed around the area. It doesn't take a genius to figure out that there isn't enough in it to win it and we turned them down. If they'd offered 30% we might have gotten busy and put some friends to work on it. But 10? No way.
Same problem here with MED. Which means this thing probably doesn't have a sincere percentage of its distributors actually selling the product. And that means it doesn't fit into my value system.
The MEANING of the business can take you into a business or out of it. It takes me out in this case. That's important. Its why I do 4Ms, not 3. If I liked the Meaning in this case, it would be hard to say 'No' to MED. Check out these Moat and Management numbers:
And the valuation numbers are just as good. The RuleOneTools show a 6.5 year Payback Time at the current price of $23 with an MOS of $80. If you don't mind the values, its way on sale.
The problem is that we reap what we sow.
You put money into places with bad values, you are going to reap those values some day. How you vote with your money is the most powerful vote you will have. Always try to put your money where your values are. You'll be more interested in what you own and that will make you a better investor. If you have good values, what you invest in will, like a good seed, sprout into good things for your family and for the world. And if your values are bad, you'll get burned and change your values. Its a win - win.
You may feel differently or you may think I'm way off base about MED. But until I hear different, MED is a business that may be doing well on the backs of the little guys and that makes me not a fan in spite of its awesome numbers.
Now go play.
